Employment income and national insurance

1 Earnings and assessment

In this TX lecture: The restriction on employment allowance where a director is the sole employee is not examined in FTX.

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In this TX lecture: The employment-versus-self-employment status tests in this clip are not examined in FTX.

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2 Employment income pro forma

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Individuals are generally assessed on the amount of cash received in the tax year. The date received is taken as the earlier of the date when the employee became entitled to the payment or the date it was actually received by the employee.

Benefits are assessed when they arise.

For directors, receipt can arise when remuneration is credited in company records or determined, as well as when paid or entitlement arises. Use the earliest relevant date. Other employees normally use the earlier of payment and entitlement. Benefits are assessed when provided.

3 Deductibility of expenses from employment income

The following expenditure is deductible:

• The general rule is that expenses must be incurred wholly, exclusively and necessarily in the performance of the duties of employment.

• Employee contributions to approved occupational pension schemes (within certain limits see chapter 9)

• Fees and subscriptions to relevant professional bodies.

• Payments to charity made under a payroll deduction scheme.

• Travel expenses incurred necessarily in the performance of the duties of employment.

• Capital allowances are available for plant and machinery provided by an employee for use in his employment duties.

4 Approved mileage allowances

1. Travel and subsistence expenses may be deducted if they are necessarily incurred in the performance of the employment duties, or for the necessary attendance at any place in the performance of the duties. NOT home to normal workplace - this is a private expense.

2. For 2025/26 the approved mileage allowance is 45 p per mile for the first 10,000 business miles, and then 25 p per mile thereafter.

3. Employees who use their own motor car for business mileage must use the approved mileage allowances in order to calculate any taxable benefit or allowable expense arising from any mileage allowances received from their employer.

4. Payments in excess of the approved mileage allowances = taxable benefit.

5. Payments less than the approved mileage allowances = allowable deduction.

5 Benefits (in kind)

The term earnings includes non-cash benefits received by the employee or provided to a member of his or her family (unless they are specifically exempt).

Exempt benefits include:

• Canteen available to all staff.

• Qualifying removal expenses up to £8,000.

• Car parking spaces at or near place of work.

• Workplace nurseries (crèches).

• Contributions by an employer to an approved pension scheme.

• Workplace parking for bicycles plus a tax free cycling allowance of 20 p per business mile.

• Provision of a mobile telephone for private use (one per employee).

• Christmas parties etc for staff (up to £150 per person per year).

• Sport and recreational facilities available generally for the staff.

• Annual exemption of up to £500 per employee where employer pays for medical treatment to assist the employee in returning to work after a period of absence due to ill health or injury.

• Outplacement counselling services to employees made redundant. The services can include counselling to help adjust to the loss of the job and to help in finding other work; i.e. retraining courses.

• Contributions towards additional household costs (such as light and heat) incurred by an employee who works at home: up to £6 per week or if higher, evidence must be provided by the employee to justify the expense.

• Long service awards up to £50 per each year of service (with a minimum requirement of 20 years service).

• Trivial benefits which do not cost more than £50 per employee which are not cash or cash vouchers and are provided for a non-work related reason.

• Use of employer bicycles and cycling safety equipment if used by employees to and from work.

• Provision of eye care tests and/or corrective glasses for employees using VDU’s (if paid directly, by reimbursement to the employee or by providing vouchers).

• Incidental overnight expenses provided by the employer for overnight stays from home. Up to £5 per night (UK) and up to £10 per night (overseas).

6 Taxable benefits

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6.1 General rules

The amount assessed is generally the cost of providing the benefit.

Where in-house benefits are provided (for example, free air travel for employees of an airline company) the amount assessed is the marginal cost incurred by the employer. If there is no marginal cost, there is no benefit.

Benefits are time-apportioned if not available for the full tax year.

Any contribution by the employee towards the benefit reduces the benefit (unless the contribution is towards fuel for private journeys (see later).

6.2 Living accommodation

1. There is no taxable benefit if the accommodation is job related:

   • where it is necessary for the proper performance of the employee’s duties (e.g. a caretaker); or

   • for better performance of the employee’s duties and (for that type of employment) it is customary for employers to provide living accommodation (e.g. hotel worker); or

   • where there is a special threat to the employee’s security and he resides in the accommodation as part of special security arrangements.

2. If the accommodation is not job related then the benefit is:

   • if accommodation is rented by the employer on behalf of the employee, the benefit is the higher of the accommodation’s annual value, and the rent actually paid by the employer.

   • If the accommodation is owned by the employer, the benefit is the accommodation's annual value and there could be an additional benefit (see below).

3. Where the accommodation is owned by the employer, there is an additional benefit where the cost of the accommodation was greater than £75,000;

   • (cost of accommodation – £75,000) × the official rate of interest (3.75%)

   • The cost of the accommodation is the purchase price of the property plus expenditure on capital improvements incurred before the start of the tax year.

4. If the employer bought the accommodation more than six years before first providing it to the employee, the property’s market value when first occupied by the employee is used in the calculation instead of purchase price but note that if the cost is less than £75,000 there is no expensive accommodation benefit irrespective of the market value when the employee first occupied the property.

5. Any accommodation benefit is reduced by any contribution paid by the employee (e.g. the employee pays the employer 'rent').

6.3 Expenses connected with living accommodation

1. Expenses such as lighting and heating are taxable on the employee if they are paid by the employer.

2. When the accommodation is job related, the taxable limit is 10% of 'net remuneration' which is the employee's employment income after expenses but before this accommodation benefit. In addition the payment of council tax by the employer is an exempt benefit if the accommodation is job related.

6.4 Use of assets (including furniture in accommodation provided by employer)

Amount assessed is the higher of:

• 20% × market value of the asset when first provided.

• rent paid by employer (if asset is rented).

6.5 Transfer/gift of assets

1. If an employee is gifted a new asset, he is taxed on the cost of the asset.

2. If an employee is gifted an asset that he has previously had private use of, he is taxed on the higher of:

   • the market value of the asset when given to him.

   • the market value of the asset when first made available to any employee less the benefit assessed on the employee(s) during the time he had the use of it.

3. The above rule does not apply to the gift of a bicycle, motor car or van, where the benefit is simply the market value of the asset when gifted.

4. If it is not an outright gift; i.e. the employee pays something for the asset, then the employee contribution is deducted from these amounts.

6.6 Car benefit

In this TX lecture: The benefit charge for a zero-emission company van is not examined in FTX.

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When a car is provided to an employee and there is some private use, the assessable benefit for each car is: the list price of the car x CO₂ emissions %.

The list price of the car is the list price when the vehicle was first registered, together with any optional extras NOT the price paid.

It is possible for the employee to make a one-off capital contribution towards the purchase of the car. For the purposes of calculating the benefit, the list price of the car can be reduced by this capital contribution up to a maximum of £5,000.

The CO₂ emissions will be given to you in the exam as follows:

Petrol and Diesel cars:

The base level of CO₂ emissions is 55 grams per kilometre.

The percentage rates applying to petrol cars (and diesel cars meeting the RDE 2 standard) with CO₂ emissions up to this level are:

Electric cars:

A 3% percentage applies to electric-powered motor cars with zero CO₂ emissions.

Hybrid cars:

For hybrid-electric motor cars with CO₂ emissions between 1 and 50 grams per kilometre. the electric range of the car is relevant in determining the car benefit percentage, as follows:

Electric Range

The car benefit is calculated as follows:

• List price x CO₂ emissions %

• For petrol and diesel cars with emissions over 55 g/km, the base percentage is calculated as 17% plus 1% for every complete 5 g/km over 55 grams

• To calculate the additional percentage round emissions down to nearest 5 g/km – deduct 55 g - divide the excess by 5.

• Add a 4% supplement for diesel cars that do not meet the real driving emissions 2 (RDE 2) standard.

• Maximum for all cars = 37%

The car benefit itself is proportionately reduced if:

• a motor car is unavailable for periods of at least 30 days of the tax year, and

• where the employee makes a contribution to the employer for the private use of the motor car.

Second motor cars

• Where more than one motor car is made available to an employee, the benefit of each motor car is computed as above.

Pool cars

The use of a pool car does not result in a company car benefit. A pool car is one provided for the use of any employee to use for business purposes, is kept at the business place of work and not normally kept overnight at the employee's home.

6.7 Fuel provided for private use

1. The car benefit covers the running costs of the car with the exception of fuel provided for private journeys.

2. The amount of fuel benefit is computed on a base figure of £28,200 multiplied by the same percentage used for calculating the car benefit.

3. The fuel scale charge is reduced proportionately where private fuel is only provided for part of the tax year.

4. No reduction is made if the employee makes partial contributions towards the cost of petrol for private use, but if he pays for ALL fuel used for private motoring the charge is cancelled.

Ordinary van benefit: £4,020; van fuel benefit: £769 where unrestricted private use/fuel is provided. Both may need time apportionment. Commuting with insignificant other private use does not create the ordinary van charge. Zero-emission van rules are not examined in FTX.

6.8 Beneficial loans

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1. A beneficial loan is one made to an employee below the official rate of interest (3.75% for 2025/26).

2. The benefit is the interest on the loan at the official rate, less any interest actually paid by the employee.

3. There is no benefit if the total loans do not exceed £10,000 in total at any time in the tax year.

4. The benefit is calculated using the average method or the accurate/strict/precise method.

   Average method.

   This uses the loan outstanding at the beginning and the end of the tax year.

   If the loan is taken out or paid back during the tax year, that date is used instead of the beginning or end the tax year.

   Accurate/strict/precise method

   This calculates benefit day by day on the balance actually outstanding.

   Either the taxpayer or HMRC can elect to use the accurate method.

In this TX lecture: Detailed PAYE operation and code calculations, payrolling of benefits, and receiving income from pension arrangements are not examined in FTX.

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7 P11D and source documents

A P11D reports taxable expenses and benefits: identify each category and its cash equivalent, using supporting employer records. Do not put every employer reimbursement on the return as an automatic deduction; apply the expense test.

8 Employed earners

8.1 Class 1 contributions

Class 1 NIC is paid by employees and employers as follows:

1. Employees

   The contributions begin when the employee is aged 16 or over. For 2025/26, the rate of employee Class 1 NIC is at 8%. It is paid where cash earnings exceed a threshold of £12,570 per annum, but only up to an upper limit of £50,270 per annum. Where earnings are above £50,270 per annum there is a rate of 2% payable on the excess. The contributions cease when the employee reaches state pension age. For employees it is payable in respect of an 'earnings period' which is usually either weekly or monthly. For directors, it is calculated annually.

2.  Employers

   The rate of employer Class 1 NIC is 15%. It is paid on cash earnings that exceed a threshold of £5,000 per annum. These are payable from the employee's 16 th birthday, but there is no upper age limit.

8.2 Class 1A Contributions

The rate of Class 1A NIC is payable only by employers on taxable benefits provided to employees. The rate is 15% multiplied by the assessable value of the benefits.

The rates are given in the tax tables at the front of the exam - use them!

9 Employment Allowance

There is an annual employment allowance of £10,500 per EMPLOYER to reduce the Employer’s Class 1 NIC payable.

For example, if the employer’s Class 1 NIC for the tax year is £16,000 the amount payable will be reduced by the £10,500 employment allowance to £5,500. If the total employer’s Class 1 NIC was say £9,500 then this would be reduced to nil.

The employment allowance does not reduce the amount of employer Class 1A NIC payable nor will it serve to reduce the amount of Class 1 employee’s NIC.

• Class 1 uses cash earnings. For weekly/monthly questions divide each supplied annual threshold by 52/12; do not use an annual threshold against one week’s pay.

• Employer Class 1 has no upper limit. The £10,500 employment allowance reduces the employer’s annual Class 1 liability, not employee NIC or Class 1A. FTX excludes the sole-director and group eligibility restrictions.